I am the Founder of Community of Liberty, a chapter based organization committed to pursuing the art of living in liberty, a member of the Publication Committee of the Claremont Review of Books, an Advisor to TheGold StandardNow.org, and a juror for the Bastiat Prize for Journalism. I have just published with my co-author Ralph Benko the booklet, "The 21st Century Gold Standard: For Prosperity, Security and Liberty," now available as a free download at AGoldenAge.com. I bring to my columns an extensive background in the investment management business, including my experience as an equity portfolio manager, strategist, president of my former firm’s retail sales and marketing subsidiary and member of the parent firm’s management committee. As such, I have been a student and observer of the political/economy and its affects on markets, businesses, and my own business for more than 30 years.

Mitt Romney Paid 30%, Not 13% In Federal Income Taxes

"The majority of the Romneys’ income is taxed twice – first at the corporate level, and a second time when they report it on their personal income tax return." (Photo credit: Wikipedia)

The presumptive Republican nominee for President of the United States and wealthy businessman Mitt Romney at a press conference last Thursday said: “Over the past 10 years, I never paid less than 13%” in federal taxes.

No doubt Romney had considered carefully how to handle the tax issue before deciding to just put the 13% number out there and then move on: “I just have to say, given the challenges that America faces — 23 million people out of work, Iran about to become nuclear, one out of six Americans in poverty — the fascination with taxes I paid I find to be very small-minded.”

Really? This statement ignores rather than confronts President Barack Obama’s narrative that the big issue before the American people in this election is fairness and social justice. And the idea that someone who makes $22 million in a single year pays only 13% in federal income taxes will be used to feed the envy and resentment the President hopes to ride to re-election.

I can only wish that Romney had engaged this issue by adding the following sound bite: “Properly calculated, my tax rate was about 30%.”

Such a statement may have led to howls of protest from his opponents and the liberal press, with accusations that Romney was obfuscating how he was able to lower his tax rate.

So what. At least this approach would have given Romney the opportunity to engage the debate over fairness and social justice on his own terms. Explaining a tax system that on its face seems unfair would have treated the American people with respect and been consistent with Romney’s identity as a serious man who will be honest and direct with the voting public.

There are two reasons that the Romneys’ tax bill is below 15%. According to their 2010 tax return (the latest available), Mr. and Mrs. Romney reduced their taxable income by the $3 million they gave to charities.

The second and most important reason is the majority of the Romneys’ income is taxed twice – first at the corporate level, and a second time when they report it on their personal income tax return.

Taxable interest income accounted for $3.3 million of their $21.7 million in total income. Since companies are able to reduce their income dollar for dollar with the interest they pay out, interest income is not taxed at the corporate level, but only once as personal income. In the case of the Romneys, it was taxed at 35%, the top marginal personal income tax rate.

The Romneys also reported $4.9 million in ordinary dividends, of which $3.3 million qualified for the 15% tax rate. Unlike interest payments, corporations may not deduct dividends from their income. Dividend income therefore is taxed twice, first at the corporate level, and then again when it is reported on an individual’s personal income tax return.

A precise calculation of this double tax is impossible to make because the tax rates paid by different corporations vary widely – from 0% by GE and General Motors to the top corporate tax rate of 35%. A rigorous economic analysis would use the top marginal tax rate because that is the rate that affects economic decisions. However, for the purpose of this analysis, a reasonable estimate would use the average U.S. corporate tax rate which, over longer periods of time, has been 25%.

Based on a 25% tax rate, for every $133 a corporation earned, it had to first pay $33 in federal income taxes before it could distribute $100 in dividends. Next, on every $100 of dividend income received, the Romneys paid an additional $15 in taxes. The combined tax of $48 totals out to a 36% rate on dividend income ($48/$133), which approximates the top personal income rate imposed on interest income.

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bnen, that was a rhetorical question and the self-evident answer is that Romney delayed recognizing income until after placing hugely undervalued assets into his IRA. It might be legal, but it is a scam on the rest of the taxpayers. Had the assets been realistically valued he would have paid income tax on $100 million that Charles Kadlec has not even counted.

Our tax system does not assess taxes on unrealized gains, so “undervalued assets” whatever that means (I think you mean assets in which the FMV > Cost) are always deferred until they are sold regardless of whether they are held in a deferred-tax retirement account or not.

Also, even outside of a tax-deferred retirment account, there are Wash Sale and Starker Exchanges Rules that defer taxes until final asset disposition.

The answer is yes, that’s how it works. The corporation is taxed differently, sorry unless you rewrite the tax code that’s the way it is. If not I will gladly NOT pay my fair share of PERSONAL income taxes stating that the corporation I work for already paid the taxes on the profits they used to pay me.

We here in the US pay taxes after paying taxes on money that was already taxed all the time. Think about it.

Absent any Wash Sale or Starker Rules an asset outside of a deferred tax account is taxable only when it is sold.

Again, the use of “undervalued” is an opinion. Meaning that one thinks that the value of an asset is more than the underlying market rate. It is fictional, because you can only earn a return on investment based on what someone is willing to pay for that asset. We all think our assets are worth more than the selling price.

All investments are purchased at cost and we later sell them at their market value. Sometimes at a loss and hopefully at a gain.

A deferred tax account (a retirement vehicle subject to certain rules and limitations) allows you and me to defer tax all tax liability when we exit and enter into an investment until we withdraw money from the account.

I am willing to wager, as a Forbes reader that you have some sort of retirement account. Whether it is an IRA or a 401(k), you are probably invested in some sort of mutual fund in which the fund manager buys and sells equities with regularity. Only in your retirement vehicle you have no tax liability incurred until you pull money out of that retirement vehicle. Conversely, you may have taxable accounts in which you routinely curse a fund manager taking too many transactions that incur a tax liability to occur. You then have to sell some of your position in that fund in order to cover the tax liability created. In both cases, you will pay some sort of tax over the life of the investment, it is only a matter of when you recognize the tax liability according to tax law.

Thanks! I read your three points as, (i) “‘undervalued’ is an opinion,” (ii) “an asset outside of a deferred tax account is taxable … when it is sold”, and (iii) it matters a great deal when income is taxed.

While “undervalued” is an opinion, opinions become facts in a market sale, tax audit or court of law. The astonishing and for practical purposes all but instantaneous “increase” in the value of these assets is powerful evidence of value at the time they were put into the tax deferred account. This in turn implies that Romney contributed assets greatly in excess of the amount permitted by law to his IRA.

It also would appear these assets have already been sold and the gains realized (otherwise the IRA should still be “valued” somewhere within the realm of reason, well under $100 million). The tax deferred account delays payment of tax. Other options may later become available to greatly reduce the tax liability (tax changes under the Ryan plan? using these assets as a charitable contribution? or …?).

We can make judgments based on the evidence available. Some people may disagree, and whether legal or not, it is not at all unreasonable to conclude that something is very much amiss with a $100 million IRA.

Well, your company makes 100,000, and the corporate entity has used all the deductions it has (overhead, capital purchases, etc…and part of that is salary). So, after Romney is paid, he now has to pay his personal tax.

If not, then why am I paying 30% as my company has already paid tax on the cash they are using to pay me?

A simplistic question in the arcane realms of taxation I know, but it seems to be the real question. Is it simply I don’t have enough money after tax and payments to invest in something that defers tax or offshore to avoid tax? If so, then perhaps reform of the US tax code should be up there with reform of political campaign funding, the influence of special interest lobbyists, and whether or not a viable third party is needed in American politics (not a person like Ron Paul, but a third party to capture the diversity of opinion and belief in America).